Shared musings by Wayne Abernathy on how the eternal things make all things new. A brief consideration. . .

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It was a long commute home today. I think that most people are all out of vacation days, and perhaps saving up what they have for the Easter holidays. Almost everyone went to work, and a lot of them chose to go home at the same time and on the same roads as I. In the slow motion on the expressway there was ample time to think and muse.

Among my musings, and considering the ongoing presidential campaign, I imagined a conversation with one of the leading Democrat candidates. I will refer to the candidate as Burning Cynders, to preserve anonymity. I will leave it to you to imagine whether this reminds you of anyone.

WAA: I understand that you want to buy votes with my money.

Cynders: I don’t buy votes. That’s what my opponents do.

WAA: You just promise them free stuff, like free college tuition and free healthcare, to be paid for out of my pocket.

Cynders: Everyone has a right to an education.

WAA: And apparently you claim the right to pick my pocket to pay for it. Sounds like you have learned how to buy votes with other people’s money.

Cynders: It’s called leadership. Someone has to stand up for people who are not as fortunate as you are.

WAA: You don’t make me feel fortunate at all.

Cynders: You are fortunate to be able to help your fellow man.

WAA: You mean, I am fortunate to have you help yourself to what I have earned so that you can give it to your cronies.

Cynders: Giving to cronies is what my opponents do. I want to give the money to young people so that they can get an education.

WAA: You, personally, are going to give the money to each of the wannabe students? You will be very busy. It’s a big country. You may find a lot of hands stretched out.

Cynders: I certainly hope so. And I will have plenty of people who will help me, who will administer the programs, people who believe in what I am trying to do.

WAA: That’s wonderful. So you will give the money to them, and they will make sure that some of it gets to the students to pay for their free education. Sounds like the happy marriage of cronyism and vote buying.

Cynders: No, these are real patriots, people who really understand what America is all about.

WAA: America is about free handouts? And taxing successful people to pay you and your cronies? Are the professors and school administrators working for free to help provide this free college tuition?

Cynders: Of course not. We need the best to teach our children. They deserve the best, and we need to invest in the best.

WAA: But I thought that you said that education is a right. How can these professors make merchandise of the students and their rights by insisting on being paid to honor those rights?

Cynders: The professors have a right to be paid, and paid commensurate with their ability and skill and knowledge.

WAA: And commensurate with their connection to you and your plan. I apparently have no right, except to let you pick my pocket to pay them so generously. Sounds like more of your cronies. I could never vote for you on such a plan.

Cynders: You don’t have to vote for me. You just need to work and make a lot of money so that I can use it to . . .

WAA: To buy the votes of the people to whom you want to give all the free stuff.

Some may think that this conversation is a caricature, but it is hard to make a caricature of someone who is himself a caricature. This is closer to reality than what emanates from such presidential candidates (there is a parallel candidate caricature for president among the Republicans).

As I said, this conversation formed in my head as I was in traffic on my way home, home from Washington, D.C. All around me were BMWs, Mercedes, Infinitis, Lexus, Acuras, and more than the occasional Jaguar and Porsche. These are the people, living in what have recently become some of the wealthiest counties in America. These are the people who would be paid by Burning Cynders to administer his free programs.

Did you notice when the Obama Administration paused in its ballyhooing about global warming? President Obama and his officials had been busily hustling the warming of the planet and its attendant disasters—which they insist can only be fixed by increasing government control of our lives, from birthing to breathing. The President was in Florida, blaming the future hurricane season—which has not yet happened—on global warming. “The best climate scientists in the world are telling us that extreme weather events like hurricanes are likely to become more powerful.” What President Obama did not mention—anywhere in his speech at the National Hurricane Center in Miami—was that the scientists predicted a “below-normal” hurricane season for 2015. Was that mercy because of or in spite of global warming?

Perhaps we should not blame the President for leaving that little item of information out, since for each of the last several years the cited “best climate scientists” (whoever they are) had predicted extraordinarily active and destructive hurricane seasons. Since each season turned out to be unusually mild, the official forecasters have now changed their tune, putting themselves solidly in-sync with recent trends. Do not put yourself at risk with a long investment on it either way.

As for global warming, however, the President and those who say they agree with him insist that the debate is over (in either science or a free nation can the debate ever really be over?), meaning that it is unacceptable to disagree with them. If you can’t say something calamitous, then don’t say anything at all.

Then, suddenly and quite unexpectedly, the global warming talk stopped. There was a mercifully, if brief, moratorium on warming warnings. Instead of predicted calamity, a real calamity was at hand that required some ‘splaining. The most recent report on the nation’s economic growth was announced. Not only had growth slowed, as measured by government number crunchers, the economy had actually declined in the first 3 months of 2015. That seemed to come as a surprise to no one who is either without a job or working in a job that is something less than the job held before 2009. But it was unwelcome news to the Administration that has been working on economic revival for going on seven years.

Instead of global warming, the Administration needed cold weather to blame for the decline in economic activity during January, February, and March. The lead official White House explanative was, “harsh winter weather”. I did not make this up, and you are not supposed to notice how convenient White House excuses are. It was better that global warming talk was cooled for a moment lest people recognize the contradictions in the official propaganda and begin to wonder whether White House policies were working.

Winter weather is not a novel excuse for failed government programs. The old Soviet Union blamed repeated crop failures on harsh winters (in Russia? Who knew?). The similarity in excuses used by the Obama White House and the Soviet Politburo is not accidental. Central planners can survive only if they have at the ready a list of excuses of things beyond their control. The list could be a long one, since in the end there is not very much about the economy that central planners can control, if control means making things go they way intended. To quote the character Jayne Cobb, in Serenity, “what you plan and what takes place ain’t ever been exactly similar.”

Ben Bernanke has a blog. You can find it here, courtesy of the Brookings Institution. Of course, what would the former Chairman of the Federal Reserve Board write about, other than decisions he made as Chairman, and why people who take issue with them are wrong? One would expect no less, and reading the light he sheds on previous decisions—offered in Fedspspeak at the time that they were made—is surely the chief lure of Ben Bernanke’s blog. Allowed to communicate in regular English, not worried about how Fed Watchers might construe or misconstrue everything he says and does not say, Ben is more able to speak his mind clearly.

The former Fed Head chose for his first blog post a vigorous defense of price controls on interest rates. In the process Bernanke demonstrates the assumption that we are safe letting government economists control the economy—an assumption continually disproven by real-world experience.

In fact, as a result of entrusting much of our economic freedom in the United States to government economists, we do not have a free market for interest rates, at least not short term rates, and we pay for that every day. The Federal Reserve sets short term rates in this country, and so far the market has had zero success in moving rates from the near zero interest rate range that the Federal Reserve has decreed and maintained for some years. Keep that in mind the next time you wonder why you earned $1.73 in interest on your savings account last year.

If you borrow money—when you can get a loan—then you might consider yourself lucky. The biggest borrower of all, in the whole world, is the United States Government. Uncle Sam must be feeling very lucky, because he is paying comparatively little on the $18 trillion of U.S. Government debt, increased by another half trillion dollars last year.

If you save money, though, especially for your retirement—and if you have to live off of those savings in retirement—you might not feel so fortunate. By keeping interest rates lower than the market would set them, the Federal Reserve is daily transferring many billions of dollars from savers to the Federal Government. And you thought that only the IRS takes your money.

Let me illustrate with an example. For the last three months of 2014, all of the banks in the United States, all of them together, paid no more than $11 billion to people who had their money in banks. Is that a lot of money? It depends. When that is the interest paid on nearly $12 trillion in deposits, the answer is, no, that is not very much money at all.

Do not blame the banks, though. They are in the saving and lending business, too. Try as they might, with the Federal Reserve controlling interest rates, banks could not pay any more interest to depositors. If a bank did, it would have more money than it could lend as people shifted their deposits where they could get a better return. To pay interest on deposits, banks cannot get much more interest from the loans they make than the Federal Reserve price controls allow, and many relatively good loans present more repayment risk (banks do need to be paid back) than those low interest rates would cover. Low interest earned means low interest paid.

All the banks in the nation have a little over $15 trillion in loans and other assets, on which they earned last year about the same amount as they did five years ago, when they had $2 trillion less in loans and other assets. In an environment of low interest rates, banks have to concentrate their lending on the safest borrowers.

That is how the low interest rates controlled by the Federal Reserve are oppressing the economy. When savers and lenders can only get a few cents on a hundred dollars lent, they place their money with the very safest of borrowers, since they cannot afford to take any losses. Someone who has a really good idea—which like all good ideas may or may not succeed the first time—has trouble getting the money to give his idea a go and hire people to help him try.

Ben Bernanke claims that the Federal Reserve’s near zero interest rate policy—called ZIRP—has been stimulating the economy. If so, where is the stimulation? Why has the recovery been so weak? There has been stimulus, but it has gone primarily to support Federal Government spending and to pay down the debt of the largest and healthiest businesses that can trade in their higher cost loans for the Federal Reserve’s lending bargains. The biggest increases in bank loans have been in Treasury debt and deposits at the Federal Reserve.

Ben Bernanke, in his blog, reminds me of the story of the lawyer representing a client charged with stealing a car and returning it damaged. The lawyer says, first, that his client never had the car; second, that he returned it in perfect condition; and, third, that it was already irreparably damaged when his client took it.

Bernanke begins by explaining that the Federal Reserve does not set interest rates, or that at most its ability to do so is only “transitory and limited.” He pleads that the Fed can only affect short term rates “in the short run.” He does not explain how seven years of ZIRP can be considered the short run. Then he progresses in his blog to describe how the Federal Reserve “influences” interest rates and then how the “Fed’s actions determine” interest rates. His argument, after denying that the Fed can set rates, is that the economy has been so weak that the Fed has had to lower interest rates for the nation’s own good. Bernanke next argues that the economy has remained so troubled (he does not say, despite ZIRP) that the Federal Reserve has had no choice but to continue with ZIRP, concluding that it is the economy after all the forces the Fed to do what it does. Do not blame the Fed Governors, they had no choice but to continue doing what they cannot do because it has not done any good so far. I think you need to have a Ph.D. in economics to make such an argument.

We cannot do it, we did what we had to do, and since it has not helped we cannot stop. I wonder how he reacted to those kind of explanations from his teenagers. Any responsible parent would reply, no, you cannot have the car, give me back the keys.

Worth Repeating

“Earned success means the ability to create value honestly—not by winning the lottery, not by inheriting a fortune, not by picking up a welfare check. It doesn’t even mean making money itself. Earned success is the creation of value in our lives or in the lives of others. Earned success is the stuff of entrepreneurs who seek explosive value through innovation, hard work, and passion.”
(Arthur C. Brooks, The Battle, p.75)

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